CHAPTER 1: INVESTMENTS

1) Saving Vs Investment: -- Savers tend to accumulate funds to address

short-term goals, whereas investors have longer-term goals, such as
building retirement corpus or funding children's college education
expenses.
2) Physical Assets Vs Financial Assets: -- Financial assets have the
advantage of greater liquidity, flexibility, convenience of investing and
ease of maintaining the investments.
3) Speculation Vs Investment :- There is a tendency to describe short-term
activities as speculative in nature and long-term ownership of assets as
investments.
4) speculation is “the forming of a theory or conjecture without firm
evidence”.
5) Investment objectives can be defined as investors’ goals expressed in
terms of risk, return and liquidity preferences.
6) The investor must be explained that the “risk leads return” and not the
other way around. Hence a detailed analysis of the risk appetite of the
investor i.e. her willingness and ability to take the risk should proceed
any discussion of the desired return.
7) Required rate of return is the minimum rate of return investors expect
when making investment decisions. It is to be noted that required rate
of return is not guaranteed return or assured return. It is also different
from expected or forecasted return. It is also different from realized
return.
8) The certainty of receiving the amount in future makes it a risk free
investment. And the rate of return on the same is called a risk-free rate.
In this case it is 5%. This risk-free rate is also referred as nominal rate of
return.
9) Hence Nominal rate of return can be decomposed into: real rate of
return and inflation rate. Real risk free rate is the basic rate of return or
interest rate, assuming no inflation and no uncertainty about future
cashflows. It is the compensation paid for postponing the consumption.
10) investors would require compensation for the uncertainty
associated with future cashflows. This additional compensation over the
nominal risk-free rate is called risk premium
11) Uncertainty of income flows caused by the nature of a firm’s
business, is defined as business risk.
12) Financial risk relates to the means of financing assets – debt or
equity. It is uncertainty caused by the use of debt financing.
13) Liquidity is defined as ease of converting an asset into cash at
close to its economic worth. The more difficult the conversion, the more
is liquidity risk.
14) Exchange rate risk is the uncertainty of return introduced by
acquiring investments denominated in a currency different from that of
the investor.
15) Political risk is the uncertainty of returns caused by the possibility
of a major change in the political or economic environment in a country
16) Geopolitics is influence of geography and politics on economics
and relationships between countries.
17) Regulatory risk is the risk associated with uncertainty about the
regulatory framework pertaining to investments.
18) Investments in equities have proven time diversification benefits
and considered to be a rewarding long-term investment. Time
diversification benefits refer to the notion that fluctuation in investment
returns tend to cancel out through time, thus more risk is diversified
away over longer holding periods. I
19) Buying and selling of unlisted investments takes longer time
compared to the listed investments.
20) G-Secs, T Bills – State development Loans carry practically no risk
of default and, hence, are called risk-free gilt-edged instruments. G Sec
is also called as dated securities.
21) Many of these corporate debt papers are listed on stock
exchanges. However, a bigger component of corporate borrowings lies
in the unlisted space.
22) The difference between the yield on a government security and
the corporate security for the same maturity is called “credit spread”.
Higher the probability of default greater would be the credit spread.
23) The convention in the market is to classify bonds with rating BBB
and above as investment grade and bonds below the BBB as high yield
or junk bonds.
24) Securities with maturities greater than one year are referred to as
capital market securities. And with less than one maturity is termed as
Money market instrument.
25) Soft commodities are perishable hence they exhibit high volatility
in their prices. Example – Corn, wheat, Soyabean etc etc
26) Soft commodities historically have shown low correlation to stocks
and bonds.
27) Prices of hard commodities are determined by the interaction
between global demand and supply.
28) commodities do not generate any current income and the investor
in these commodities would have to count only on capital appreciation.
29) Distressed securities are the securities of the companies that are
in financial distress or near bankruptcy.
30) Structured products greatly use derivatives to create desired risk
exposures. Structured products are customized and sophisticated
investments.
31) To make rewarding investment decisions, specialized knowledge
in arts is more crucial than in traditional financial assets due to higher
levels of information asymmetry and adverse selection problems.
32) As per SEBI Regulation relating to RIAs which came in the year
2013, only qualified professionals who are licensed by SEBI as Registered
Investment Advisers (RIAs) can act as ‘advisers’
33) Category I AIF – is an AIF that invests in start-up or early stage
ventures or social ventures or SMEs or infrastructure or other sectors or
areas which the government or regulators consider as socially or
economically desirable
34) Category II AIF- , AIFs such as private equity funds or debt funds
for which no specific incentives or concessions are given by the
government
35) Category III AIF – is an AIF that which employs diverse or complex
trading strategies and may employ leverage including through
investment in listed or unlisted derivatives. AIFs such as hedge funds
36) SEBI does not prescribe any scale of fee to be charged by the
portfolio manager to its clients. Rather it permits the portfolio manager
shall charge fee as per the agreement.
 CHAPTER 2: INTRODUCTION TO SECURITIES MARKETS

1) SCRA, derivatives include a security derived from underlying financial

securities.
2) Primary Market: The primary market, also called the new issue market,
is where issuers raise capital by issuing securities to investors. Fresh
securities are issued in this market. Listing of unlisted company is
another name for this activity.
3) Secondary Market: The secondary market facilitates trades in already-
issued securities, thereby enabling investors to exit from an investment
or new investors to buy already existing securities.
4) The capital market enables – capital creation and transfer, Price
discovery of securities and Liquidity in the financial market besides host
of benefits to the associated participants and economy.
5) Further Public Offer (FPO): When an already listed company makes
either a fresh issue of securities to the public or an offer for sale to the
public, it is called a further public offer or FPO.
6) Rights Issue: Shares offered to existing shareholders in proportion to
their existing holding in the share capital of the company are termed as
“Rights shares”. An offer can be fully or partly subscribed.
7) Qualified Institutions Placement (QIP) is a private placement of shares
made by a listed company to certain identified categories of investors
known as Qualified Institutional Buyers (QIBs).
8) Bonus issue is entitlement to existing share holder. A bonus issue in the
ratio 1:3 entitles the shareholder to 1 bonus share for every 3 held.
9) A bonus issue in the ratio 1:3 entitles the shareholder to 1 bonus share
for every 3 held. Company Board approves the Bonus declaration.
10) Offer for Sale (OFS): An Offer for Sale (OFS) is a form of share sale
where the shares offered in an IPO or FPO are not fresh shares issued by
the company, but an offer by existing shareholders to sell shares that
have already been allotted to them. An OFS does not result in increase in
the share capital of the company since there is no fresh issuance of
shares
11) ESOP- The dates on which the employees become entitled to
exercise the right to acquire the shares is called as “vesting date.” The
rights may vest fully or partially over the vesting period.
12) An Indian company that is not eligible to raise equity capital in the
domestic market is not eligible to make an FCCB issue either. Unlisted
companies that have raised capital via FCCB in foreign markets are
required to list the shares on the domestic markets within a stipulated
time frame. FCCBs are regulated by RBI notifications under the Foreign
Exchange Management Act, 1999 FEMA)
13) To issue a Depository Receipt, a specific quantity of underlying
equity shares of a company is lodged with a custodian bank, which
authorizes the issue of depository receipts against the shares.
Depending on the country of issue and conditions of issue, the DRs can
be converted into equity shares.
14) Anchor investor means a qualified institutional buyer who makes
an application for a value of ten crore rupees or more in a public issue
made through the book building process. It also sets a benchmark and
gives a guideline for issue pricing and interest among QIBs.
15) In the primary market, the issuers have direct contact with the
investors, while in the secondary market, the dealings are between
investors only.
16) The trades executed on the exchange are settled through a
clearing corporation, which acts as a counterparty and guarantees the
settlement of the trades to both buyers and sellers.
17) Clearing and settlement are post trading activities that constitute
the core part of equity trade life cycle.
18) The clearing corporation provides full novation of contracts
between buyers and sellers, which means it acts as buyer to every seller
and seller to every buyer. As a result, the operational risk of the
transaction is substantially reduced to a trading investor.
19) Risk Management by Clearing Corporation:- Initial margin is a
percentage of transaction value arrived at based on concept of “Value At
Risk” philosophy and MTM margin is the notional loss which an
outstanding trade has suffered during a specified period on account of
price movements.
20) Depositories - Depositories are institutions that hold securities
(shares, debentures, bonds, government securities, mutual fund units)
 of investors in electronic form. A Depository Participant (DP) is an agent
of the depository through which it interfaces with the investors and
provides depository services.
21) Trading members can be individuals (sole proprietor), Partnership
Firms or Corporate bodies. Authorized persons (AP): Authorise Persons
are agents of the brokers (previously referred to as sub-brokers) and are
registered with the respective stock exchanges
22) Clearing Banks - Clearing Bank acts as an important intermediary
between clearing members and the clearing corporation. Every clearing
member needs to maintain an account with the clearing bank. It is the
clearing member’s responsibility to make sure that the funds are
available in its account.
23) Merchant Banker are the single point contact for issuers during a
new issue of securities.
24) Underwriters are intermediaries in the primary market who
undertake to subscribe any portion of a public offer of securities which
may not be bought by investors. When the underwriters make their
commitments at the initial stages of the IPO, it is called hard
underwriting. Soft underwriting is the commitment given once the
pricing is determined.
25) The SEBI (Alternative Investment Funds) Regulations 2012 (AIF
Regulations) define the term ‘Alternative Investment Fund’ (AIF) as one
which is primarily a privately pooled investment vehicle. AIFs: Venture
Capital Fund, Angel Fund, Private Equity Fund, Debt Fund, Infrastructure
Fund, SME Fund, Hedge Fund and Social Venture Fund.
26) EPFO: EPFO (Employees’ Provident Fund Organization) is a
statutory body set up under the Employees’ Provident Funds &
Miscellaneous Provisions Act, 1952. EPFO comes under the purview of
Ministry of Labor and Employment. From 2015, EPFO is allowed to invest
up to 15 per cent of incremental deposits in equity or equity related
schemes.
27) The Central Government had introduced the National Pension
System (NPS) with effect from January 1, 2004. Subsequent to Central
Government, various State Governments adopted this architecture and
implemented NPS with effect from different dates.
28) NPS Corporate Sector Model is the customized version of NPS to
suit various organizations. NPS schemes invest in equity shares,
corporate bonds and government securities.
29) As per the SEBI Issue of Capital and Disclosure
Requirements(ICDR) Regulations, 2018: ‘Retail individual investor’
means an individual investor who applies or bids for specified securities
for a value of not more than Rs.2 lakh
30) The focus area of corporate treasuries has been debt
management to capital structure management with the key
responsibility of raising long term funds and minimizing the cost of
capital.

CHAPTER 3: INVESTING IN STOCKS

1) The most meaningful way to risk reduction is through diversification –
both on cross sectional as well as on time series basis. ‘Diversification’ is
the concept of business cycles and counter-cyclical businesses. There is
also the understanding of lagging and leading behaviour of investments
returns, countries’ economic performance.
2) “Time in the market” is suggested for equity investment as against
“timing the market”.
3) Liquidity risk is measured by impact cost. The impact cost is the
percentage price movement caused by a particular order size (let’s say
an order size of Rs.1 lakh) from the average of the best bid and offer
price in the order book snapshot. The impact cost is calculated for
both—the buy and the sell side.
4) Preference share do not generally have voting rights like equity shares,
unless stated otherwise. Preference shares share some characteristics
with debt securities like fixed dividend payment. Similar to equity
shares, preference shares can be perpetual.
5) A non-participating preference share is one in which a dividend is paid,
usually at a fixed rate, and not determined by a company’s earnings.
Participating preference share gives the holder the right to receive
 specified dividends plus an additional dividend based on some pre-
specified conditions. Participating preference shares can also have
liquidation preferences upon a liquidation event.
6) Shares with DVRs can either have superior voting rights (i.e. multiple
votes on one share) or inferior voting rights (i.e. a fraction of the voting
right on one equity share) or differential rights as to dividend.
7) Tata Motors was one of the first companies in India to issue DVRs in
2008. These DVRs carried 1/10 voting rights and 5% higher dividend than
ordinary shares. Since then, Pantaloon retails (currently Future
Enterprises Ltd.), Gujarat NRE Coke Ltd., Jain Irrigation Systems Ltd. have
issued DVRs.
8) Large cap companies as a group have lower variability in return than
small cap companies.
9) Equity research involves thorough analysis and research of the
companies and its environment. Equity research primarily means
analysing the company’s financials and non-financial information, study
the dynamics of the sector the company belongs to, competitors of the
company, economic conditions etc..
10) Analysts use fundamental analysis - top-down approach or
bottom-up approach - quantitative screens, technical indicators etc., to
select stocks.
11) Investors who are engaged in fundamental analysis believe that,
intrinsic value may differ from the market price but eventually market
price will merge with the intrinsic value
12) Fundamental analysis involves economy analysis, industry
analysis, and company analysis.
13) Analysts follow two broad approaches to fundamental analysis—
top down and bottom up. The factors to consider are economic (E),
industry (I) and company (C) factors. Beginning at company-specific
factors and moving up to the macro factors that impact the performance
of the company is called the bottom-up approach.
14) Buy-side Analysts work for money managers like mutual funds,
hedge funds, pension funds, or portfolio managers that purchase and
sell securities for their own investment accounts or on behalf of their
clients.
15) Sell-side Analysts work for firms that provide investment banking,
broking, advisory services for clients. They typically publish research
 reports on the securities of companies or industries with specific
recommendation to buy, hold, or sell the subject security.
16) The value of an investment is determined by its expected cash
flows and the investor’s/analyst’s required rate of return (i.e. its
discount rate). The expected cashflows as well as required rate of return
are influenced by the economic environment
17) Fiscal policy initiatives such as tax reduction encourages spending
while removal of subsidies or additional tax on income
discouragesspending. Similarly, monetary policy may reduce the money
supply in the economy affecting the expansionary plans and working
capital requirements of all the businesses.
18) Financial institution or bank stocks are typically placed among the
most interest-sensitive of all stocks. Sectors such as pharmaceuticals are
less affected by interest rate change.
19) The economy and the stock market have a strong and consistent
relationship. The stock market is known as a leading economic indicator.
20) Banking and financial sector perform well towards the end of a
recession. During the phase of recovery, consumer durable sectors such
as producers of cars, personal computers, refrigerators, tractors etc.
become attractive investments.
21) Cyclical industries are attractive investments during the early
stages of an economic recovery. These sectors employ high degree of
operating costs.
22) At the peak of business cycle, inflation increases as demand
overtakes supply.
23) Competition influences the rate of return on invested capital. If
the rate is "competitive" it will encourage investment. Porter looked at
forces influencing competition in an industry and the elements of
industry structure. He described these forces as industry’s micro-
environment.
24) Financial statement analysis of the company is often the starting
point in analysing company. Analysing the profit and loss account,
balance sheet and the cash flow statement of the company is
imperative.
25) Michael Porter suggests two major strategies: Cost Leadership and
Differentiation.
26) Fundamental Analysis: - Retail sector, footfalls and same store
sales (SSS) are important parameters, whereas for banking it is Net
Interest Income (NII)/ Net Interest Margin (NIM). For telecom, it is
Average Revenue per User (ARPU) and for hotels; it is average room
tariffs etc.
27) One is the free cash flows to the firm (FCFF), where the cash flows
before any payments are made on the debt outstanding are taken into
consideration. This is the cash flow available to all capital contributors—
both equity and debt.
28) Another is to estimate the cash flows that accrue to the equity
investors alone. An interest payment on debt is deducted from the FCFF
and net borrowings added to it to arrive at the free cash flows for equity
(FCFE).
29) Since equity is for perpetuity and it is not possible to forecast the
cash flows forever, the practice is to calculate a terminal value for the
firm once the high growth period is over.
30) The discount rate used in the DCF valuation should reflect the
risks involved in the cash flows and also the expectations of the
investors.
31) To calculate the value of the firm, the FCFF is discounted by the
weighted average cost of capital (WACC) that considers both debt and
equity. To calculate the value of equity, FCFE is discounted using the cost
of equity.
32) Capital Asset Pricing Model - CAPM, establishes the relationship
between risk and expected return forms the basis for cost of equity.
33) Asset Based valuation methodology is used in some businesses
which are extremely asset oriented such as real estate, shipping,
aviation etc.
34) Discounted cash flow models are used to estimate the intrinsic
value of the stock or entity. The relative valuation metrics are used to
determine the value of an economic entity (i.e. the market, an industry,
or a company) by comparing it to similar entities.
35) Relative Valuation Matrix: PE, PBV, PS, PEG, EVA, MVA, EBIT/EV,
EV/EBITDA, EV/S
36) Technical Analysis is a specialized stream in itself and involves
study of various trendsupwards, downwards or sideways, so that traders
can benefit by trading in line with the trend.
37) Technical analysis converts the price and volume data into charts
that represent the stock price movements over a period of time. Some
of the charts used include line charts, bar charts, candlestick chart. The
patterns thrown up by the charts are used to identify trends, reversal of
trends and triggers for buying or selling a stock.
38) Fundamental analysts believe that prices will move towards their
intrinsic value sooner or later. Technical analysis is not concerned if the
stock is trading at a fair price relative to its intrinsic value. It limits itself
to the future movements in prices as indicated by the historical data. It is
used for short-term trading activities and not necessarily long-term
investing.
39) Some of the popular Technical analysis tools are: • Trend-line
analysis • Moving averages • Bollinger-Band Analysis.
40) Bollinger-Band Analysis Bollinger bands use normal distribution to
calculate the deviation of the market price from the moving average.
One simple strategy for using the moving-average analysis is to buy
when the price is sufficiently below the moving average and sell when
the price is sufficiently above the moving average.

A Compilation By:--

Bhardwaj Edumotive Consultancy Bangalore

sanatbharadwaj@gmail.com